SCHD: A Simple-to-Use ETF With a 4% Increasing Yield (NYSEARCA: SCHD)

Focused

The Schwab US Dividend Equity ETF (NYSEARCA:SCHD) has been heavily criticized by some passive income investors lately, mainly because the exchange-traded fund has posted weaker performance reports compared to the past.

Additionally, the Schwab US Dividend Equity ETF increased its dividend by 4% in 2023, creating some discontent among holders of the exchange-traded fund.

While it’s true that the Schwab US Dividend Equity ETF has disappointed in the short term, primarily due to its overweight to the financial sector, the ultimate goal of dividend growth investing is to focus on the long term.

Given that the Schwab US Dividend Equity ETF has generated solid returns throughout its history, passive income investors should not be discouraged by the ETF’s recent decline in performance and the ETF’s dividends will continue to grow.

My rating history

The Schwab US Dividend Equity ETF became my largest investment in an exchange-traded fund in March, despite persistent inflation headwinds. The pro-cyclical nature of the Schwab US Dividend Equity ETF was one of the rationales for my investment. Buy and this supported my decision to overweight SCHD in my portfolio.

I believe the exchange-traded fund will be able to change its dividend growth trajectory going forward and estimate this year’s dividends could increase by 7% year-over-year.

Finances weigh on short-term performance

The Schwab US Dividend Equity ETF’s portfolio is procyclical but defensively structured, which didn’t serve the exchange-traded fund well in 2024, especially at a time when investors were looking for quick gains in the technology/computer/semiconductor sectors.

The Schwab US Dividend Equity ETF is overweight the financial sector, which represents 17% of the ETF’s investments. Health care technology and consumer non-durable goods are the next two largest sectors.

Asset distribution (Finviz)

The portfolio itself hasn’t changed much, with roughly the same names in the top 10 as before. However, ETF rebalancing earlier this year has dropped Broadcom, Inc. (AVGO) whose stock price has seen a sharp rise due to its exposure to artificial intelligence.

It’s leaving behind winners like Broadcom, which raised its quarterly common stock dividend by 14% in the fourth quarter of 2023. Home Deposit (HD), Cisco Systems Inc. (CSCO), ABBVIE Inc. (ABBV), Amgen Inc. (AMGN) And Chevron Corp. (CVX).

Top Holdings (Schwab US Dividend Equity ETF)

Dividend growth is disappointing, but probably only in the short term

The Schwab US Dividend Equity ETF only increased its dividend by 4% in 2023, which is significantly lower than the exchange-traded fund average over the past two years.

Since 2019, the ETF has increased its dividend by 11.5% per year, so the latest increase was a real disappointment, probably not just for me, but for many other passive income investors who have become accustomed to more generous dividend hikes. Below are the annual dividends for the last five years:

2019: $1.72

2020: $2.03

2021: $2.25

2022: $2.56

2023: $2.66

2024: $2.87 (estimate based on annualized dividends for the first half of 2024)

Based on dividends already paid (and annualized) in the first two quarters of 2024, the Schwab US Dividend Equity ETF could pay total dividends of around $2.87 this year, implying an annual growth rate of 8%, so we could see some sort of acceleration in dividend growth here compared to 2023.

Over the long term, the Schwab US Dividend Equity ETF has hardly disappointed with a dividend growth rate of 10%, and I think investors are a little too critical of the exchange-traded fund right now, even though Broadcom’s fall was clearly a big disappointment.

Not only has the Schwab US Dividend Equity ETF’s dividend growth underperformed recently, but the ETF itself, in terms of price performance, has also not fared well. The 4% year-to-date return is far below any measure of long-term performance. The 5-year annualized return, for example, is 13.4%, which is not exactly a return to be taken lightly.

Annualized Returns (Schwab US Dividend Equity ETF)

SCHD NAV Premium History

Schwab’s website states that the last reported NAV as of June 28, 2024 is $77.74. Given that the ETF is selling at $77.28 at the time of writing, the valuation reflects a 0.02% premium, which historically does not indicate undervaluation or overvaluation.

The value of an ETF is roughly the sum of the net asset values ​​of the underlying components. So, over the long term, as one would expect, the ETF was actually valued at around its net asset value.

Net Asset Value (Schwab US Dividend Equity ETF)

Why the investment thesis may disappoint

There can be no assurance that the Schwab US Dividend Equity ETF will increase its dividends in the future at the same rates as in the past.

The Schwab US Dividend Equity ETF has recently been pushed to the back burner by other, more popular segments of the market, such as semiconductors, and its performance has been disappointing, both in terms of price appreciation and dividend growth. Over the long term, however, the ETF has performed quite well, and I see no reason why this track record should be challenged.

Given that the Schwab US Dividend Equity ETF is concentrated in the financial sector, I think the ETF could be hurt in the event of another banking crisis.

All things considered, I think the risk/reward ratio, given the ETF’s strong long-term performance and dividend growth history, favors an investment in SCHD more than it does against it.

My conclusion

Technology names, particularly in the semiconductor market, have driven the market higher so far in 2024 and more defensive, core exchange-traded funds, like the Schwab US Dividend Equity ETF, have been less popular as a result.

Over the long term, however, I believe the Schwab US Dividend Equity ETF will continue to generate dividend growth comparable to that of the past, particularly if market risk attitudes change and investors allocate larger portions of their portfolios to more defensive investments.

The ETF’s approach of focusing on companies that increase their dividends and have high yields has proven to be very profitable for long-term passive income investors.

As usual, investors who stay the course and continue to invest funds and reinvest their dividends are poised to come out ahead as compounding works its magic.

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